Equity Markets Resume Their Upward Trek
Global markets began the month slowly, as the European Central Bank and the Bank of Japan started taking a more hawkish approach to quantitative easing, causing global bond yields to back up. Comments from U.S. Federal Reserve Chairwoman, Janet Yellen, expressing deeper concern over the persistence of inflation weakness, were the bullish signal that the markets needed. Yields began to reverse course, and equity markets resumed their upward trek. Global equities outperformed U.S. equities, with emerging markets performing particularly well.
The yield curve ended unchanged after initially rising early in the month on the increase in global yields. Credit spreads dropped over the course of the month, reflecting the continued optimism that permeates risk assets.
On the economic front, the advanced estimate of second-quarter real gross domestic product (GDP) was below expectations, but was still strong at 2.6%. Headline inflation went down to 1.6%. Employment gains were positive and exceeded expectations. Consumer confidence climbed.
Hedge funds had positive returns, with the broad index (HFRI Hedge Fund of Funds Index) up for the month. Seven out of the eight strategies had positive returns, with Equity Hedge, Event Driven, Relative Value, and Macro leading the way. Merger Arb was the only strategy to post a small negative return for the month.1
Key Economic Data2
- The U.S. Bureau of Economic Analysis (BEA) released the “advanced” estimate of real gross domestic product (GDP) growth of 2.6% in the second quarter of 2017. Real GDP grew by 1.2% in the first quarter of 2017, 2.1% in the fourth quarter of 2016, and 3.5% in the third quarter.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was 0%. Core inflation (CPI – Ex Food and Energy) was 0.1%. For the last 12 months, the CPI-U NSA was 1.6%, and the CPI-Ex Food and Energy was 1.7%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 222,000 after adding a revised 152,000 jobs in the prior month. Private sector payroll employment added 187,000 jobs, following a revised increase of 159,000 jobs in the prior month. The unemployment rate was 4.4%. The underemployment rate was 8.6%. The labor force participation rate was 62.8% last month.
- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 610,000, a change of 0.8%. Housing starts were 1,215K, a change of 8.3%. Building permits were 1,254K units, a change of 7.4%. Existing home sales were 5.52 million units, a change of -1.8%.
- The Conference Board Consumer Confidence Index® was 121.1.
1. IndexIQ, Factset as of 07/31/17.
2. IndexIQ, Factset as of 07/31/17.
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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.
Basis points (BPS) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds that involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.
A Global Macro strategy is a strategy that bases its holdings, such as long and short positions in various equity, fixed-income, currency, commodities, and futures markets, primarily on the overall economic and political views of various countries, or their macroeconomic principles.
Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.
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